| Fellow Investor, In a speech yesterday, Fed Chief Ben Bernanke made two very important statements. First, he said that he believes the inflation we are experiencing due to higher commodity prices is temporary. Second, he said he could be wrong. The specific quote goes like this: "We have to monitor inflation and inflation expectations extremely closely because if my assumptions prove not to be correct, then we would certainly have to respond to that and ensure that we maintain price stability..." Now, I know a lot of readers will say that Bernanke needs to get his head out of...um...the sand, and deal with rising prices right away. And it's hard to imagine that a rise in the overnight lending rate, or even a quarter-point rate hike, would send the economy into a tailspin and squash the momentum in the jobs market. But, at the same time, jobs growth is still pretty anemic. 200,000 jobs a month isn't going to move the unemployment rate very quickly. And so long as housing prices are falling, headline inflation measures (CPI, PPI) aren't going to show runaway inflation. And while I am bullish on oil, it's also clear that there is a significant fear premium in the price of oil as Middle East is still dicey. In fact, we could see oil prices drop as much as $20 a barrel once (if?) stability returns to the region. *****I'm actually impressed that Bernanke acknowledged he could be wrong about inflation. Humans are fallible, and there's wrong with admitting as much. Yes, it's politically dangerous to admit that one could be wrong. And you don't hear many in Congress or the Administration admit they could be wrong. In fact, I suspect Bernanke is less likely to make a mistake on inflation if he realizes and acknowledges he could be wrong. It's when a person is 100% convinced he or she is correct that the big mistakes happen. It's called hubris. I'm sure you will see plenty of investment gurus wailing that Bernanke is weak because of this. Don't believe them. Markets and economies are fluid, there's no way anyone can "know" what will happen next. | Special opportunity, article continues below.
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| *****Back to the housing issue, this sector is the main drag in inflation right now. If home prices were rising instead of falling, inflation measures would be much hotter and the Fed would have to raise rates. It's highly unlikely that we get a rebound for home prices this year. Just keep an eye out -- housing prices will tell us when the Fed is going to hike rates. *****China hiked interest rates another quarter-point last night. This is the fourth interest rate hike in the last 6 months. Unlike the U.S., China is battling rising housing prices. It's also raise reserve requirements at banks to stem lending. And loans are reportedly down 25% year over year. We'll see if that's enough to get China's inflation rate back under control. Recently, I've written that analysts and economists suspect that China may be nearing an end to its attempts to reel in inflation. And with growth rates still strong, there could be a bullish shift in sentiment toward Chinese stocks. That would be fine by me, Chinese stocks have been in a downtrend for about 2 years... *****Jason Cimpl is a little worried that stocks will rally right into Q! earnings season. This morning, he told his TradeMaster Daily Stock Alerts: Eventually, I believe the market will make new highs, but as I mentioned yesterday, I would prefer consolidation above 1301 this week. I think the market is setting itself up for a colossal failure if it tries to break out ahead of Q1 earnings. There have been no significant earnings warning for Q1 earnings season. But at the same time, we know that input prices have been rising, as commodity prices rise. This will put pressure on margins and has the potential to affect earnings forecasts. Analysts are always looking at forward guidance at least as much as actual earnings. But for this earnings season, guidance has the most potential to disappoint as its had in a while. Until tomorrow,  | Ian Wyatt
Editor
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